Looking for income? I’d buy these 2 FTSE 100 stocks which yield 7% tax free in an ISA

Harvey Jones picks out two FTSE 100 (INDEXFTSE:UKX) stocks offering juicy yields right now.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you are heading into retirement, or already there, generating an income from your investments becomes a priority. FTSE 100 stocks are one of the best ways of doing it, with the index currently yielding around 4.5%, more than you’ll get from any savings account.

The following two pay even more than that, around 7%. Better still, if you buy them inside a Stocks and Shares ISA, you can take that income completely free of tax.

HSBC Holdings

Banking stocks are once again a happy hunting ground for dividend investors, particularly Asia-focused HSBC Holdings (LSE: HSBA), which currently offers a mighty forward yield of 6.8%, covered 1.4 times by earnings. Management has been fairly progressive, increasing the payout seven times in the last 10 years. So, with luck, you’ll be locking into a rising income as well.

A dividend of this size can make investors cautious, as they fear it may not be sustainable. This isn’t a major concern with HSBC which, in August, reported an 18.1% rise in first-half profit, after tax, to $9.9bn. Reported revenues also rose 7.6%, and reported operating expenses fell 2.3%. Flush with cash, it’s shortly initiating a $1bn share buy-back.

Growth is a different matter. The HSBC share price trades at similar levels to five years ago, despite a 15% rise on the FTSE 100 over that time. The £123bn giant is facing headwinds in its key Asia division, which have been worsened by the US-China trade war. Brexit has also added a layer of uncertainty, and falling interest rates are squeezing net interest margins.

Much of these concerns are priced into a low forward valuation of just 10.6 times earnings, giving investors a nice safety margin. As an income seeker, you can watch the dividends roll in, and let the share price take care of itself over the longer term.

Standard Life Aberdeen

The Standard Life Aberdeen (LSE: SLA) share price has also had a disappointing run, trading 26% lower than five years ago. You can put much of that down to teething problems over the recent merger, which backfired as Lloyds threatened to pull its £109bn Scottish Widows mandate as a result. This could cost the new group hundreds of millions in fees, offsetting many of the cost savings and synergies.

The dispute was settled in July, largely in the group’s favour, as Lloyds was ordered to pay £140m in compensation, while Standard Life Aberdeen will hold on to a third of its mandate until at least April 2022.

In August, management reported that “lower redemptions and better markets” helped boost assets under management by 5% to £577bn in the first half. The group is now spreading its wings globally, expanding in two massive markets – India and China.

The Standard Life Aberdeen share price has actually risen 15% in a month, helped by an improvement in wider stock-market sentiment. Investors had also braced themselves for a dividend cut that never came.

The forecast yield is a whopping 7.6%, but cover does look thin at 0.9, so there’s a chance the dividend could prove vulnerable. Trading at 15.5 times forward earnings, a fair bit higher than HSBC, this isn’t a bargain.

Given these two concerns, HSBC would be my preferred pick.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »